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United Kingdom: Institutions involved in the crisis management

youish
• 2009.03.10. 18:24

BACKGROUND. The rising defaults on subprime mortgages in the US triggered a global financial and economic crisis. Since national economies separately and the global economy as a whole are both paralysed without a functioning financial sector, governments are intervening to shore up the financial system.

ANALYSIS. Bank crisis management at the national level comprises an array of different responses. As a result of the great complexity of inter-linkages both within and across financial systems, policy makers had to take into account that it is not possible to reform one part of the structure without considering the others.

When confronted with failed or failing banks, public authorities have at their disposal:

  • Central bank intervention through monetary operations (interest rate operation, liquidity operation, security lending)
  • Regulatory tightening to enhance the transparency of the financial system;
  • Government guarantees for depositors and banks including asset guarantees and  bail out schemes;
  • Fiscal expansion to stimulate to economic growth through increasing demand;

The recent turmoil has exposed the financial system of the United Kingdom to considerable level of economic damage as well. The long-lasting consequences of the financial crisis in the money market and national economy have heightened the need for British policy makers to consider corrective policy options of bank resolution, restructuring techniques and the formation of an appropriate structure for handling crisis management.

Institutions. The financial stability of the United Kingdom is supervised by the government department responsible for financial affairs (Her Majesty’s Treasury), an independent central bank (Bank of England) and an authority for the regulation of individual firms (the Financial Services Authority).

A framework for co-operation between these institutions has been signed in 1997. The tripartite framework sets out the role of each authority, and explains how they work together towards the common objective of financial stability in the UK. The Standing Committee meets each month to share assessments from the three authorities, to monitor financial stability and to consider issues of common concern.

TREASURY. The Treasury, the United Kingdom government department is the overall institutional structure of financial regulation and the legislation.

The Treasury has no operational responsibility for the activities of the FSA and the Bank and shall not be involved in them. But since it is responsible for formulating and implementing the UK Government's financial and economic policy, it has been co-operating with the two other authorities in the crisis management. The Treasury provides the link between the authorities and wider government.

The Treasury has an initial role in authorisation of support operations, implications of protection measures, and introduction of new legislation  

Government’s measures to address the recent crisis:

  • Government-supported re-capitalisation scheme for UK banks and building societies. The Government takes stakes in participating banks through preference shares or permanent interest bearing shares, and may also underwrite issues of ordinary shares.
  • Government guarantee for institutions taking part in re-capitalisation scheme for their unsecured debt instruments for terms up to three years

BANK OF ENGLAND. The Bank of England is the United Kingdom’s central bank. It contributes to the maintenance of the stability of the financial system as a whole. The Bank is independent from the British government, but according the tripartite agreement with the Treasury and FSA, they co-operate in crisis management.

The involvement of the Bank in crisis resolution is necessary because of

  • its continuing lender of last resort function,
  • its responsibility for maintaining overall financial and monetary stability, and
  • its operation to provide emergency financial assistance to individual firms or to the market as a whole

Measures of the Bank of England to address the recent crisis:

  • Setting up facilities to buy private-sector assets (corporate bonds, commercial papers)
  • Special Liquidity Scheme for providing the banking system the amount of liquidity they need to fulfil their liquidity deficit (GBP 200 Bn October 2008,  GBP 185 Bn in February 2009)
  • Interest rate operations (the interest rate in the UK sank from 5% to 1% between October 2008 and March 2009) 
  •  

FINANCIAL SERVICE AUTHORITY. The Financial Services Authority (FSA) is an independent non-governmental body. The FSA regulates the financial services industry under four objectives: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

The FSA's has an important role in crisis management as it is responsible for the authorisation and prudential supervision of authorised firms, such as banks, building societies, investment firms, insurance companies and brokers, credit unions and friendly societies; facilitating private sector resolution of crises; and assessing the potential systemic implications of a crisis.

FSA’s package of measures designed to recent crisis resolution:

  • tighten regulation for the amount of capital to weigh against the risks their trading desks take
  • requirement of a fundamental review of the division between the trading and banking books and of the appropriate use of VAR to measure risk
  • temporary ban on short-selling

CONCLUSION. As a response, the British government introduced comprehensive plan in relation to the present financial crisis. The resolution plan includes a wide range of emergency measures involving different regulatory and operational authorities and institutions. Co-operation between Treasury, Bank of England and FSA is achieved by the distribution of different tasks. However, the recent turmoil has such a great impact on the British economy, that even the co-operation of authorities will not itself save the economy from recession. But with an aligned intervention, the paralysis in the banking system and a long-term depression could be avoided.

 

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